Zhang Yiming, one of the co-founders of ByteDance, has always emphasized the importance of return on investment. He believed that tasks such as determining what an app should be called do not warrant significant resources. TikTok found its name after lengthy A/B testing, with Zhang making the final decision, according to the company.
A former ByteDance employee has said that many English-language names were part of the tests. “TikTok” performed well because it was easy to pronounce, but it wasn’t the top choice. It was originally sourced from a song released in 2009 by pop singer Ke$ha. The former staffer recalled that Zhang said ByteDance could name their international short video app TikTok for a short time, then change it down the line if needed.
ByteDance’s competitive advantage is its sticky content recommendation algorithm. The company excels at developing middleware—software that works between an operating system and the applications running on it—and all its core technologies exist in this form. ByteDance continually develops new apps that can use these proprietary algorithms and their related monetization strategies. The news aggregation app Toutiao was the company’s first success in China. TikTok, however, represented a new phase in ByteDance’s development.
The company’s acquisition of Musical.ly in 2017 made that growth possible for TikTok. Musical.ly’s purpose and design were the perfect match for ByteDance’s technical offerings, but there were speed bumps along the way before Musical.ly could merge with TikTok.
Originally incubated in Shanghai, Musical.ly was a short video app with an emphasis on musical accompaniment. Unlike ByteDance’s Zhang Yiming, Musical.ly’s co-founders, Alex Zhu (Zhu Jun) and Louis Yang (Yang Luyu), were Type-A personalities with a creative flair. They expressed their creativity by developing a way for people to be entertained online but didn’t have a deep understanding of recommendation algorithms that could reshape the user experience.
Musical.ly was created by accident. Its co-founders were once colleagues at eBaoTech, a B2B insurance service provider. Yang branched out to start his own business based on the belief that short educational videos would be meaningful for users. Meanwhile, Zhu was working for SAP, a software company in the United States. By chance, the two chatted about online education, leading to Zhu joining Yang’s venture as a co-founder. The first app they built failed to gain traction due to high production costs for education-focused clips.
That hurdle gave the pair an opportunity to accumulate knowledge about social platforms, leading to a shift toward entertainment. Yang and Zhu believed that young people had a deep desire to express themselves, so they developed an app based on that idea, with the tagline “live like music.” This led to the pair launching the Music Land app in 2012, which also ended in failure.
At the time, China’s 4G network was still being rolled out, but the apps that Lu and Zhu built required that infrastructure. They decided to launch their next product for users in the US, where there were faster internet connections. They originally intended to name the app Music.ly, with the suffix mirroring the initials of Luyu. But that domain was already taken, so they settled on Musical.ly. Libya was engulfed in civil war at the time, so domains with the country code “.ly” were a bargain.
Musical.ly went live in 2014 and quickly became a favorite among teenagers in the US. In two years’ time, it reached 5 million DAUs and 20 million MAUs, but growth soon tapered off because the app couldn’t shake its “just for teens” image. The app also had a weak recommendation algorithm and couldn’t displace ByteDance’s Douyin or Kuaishou, which were the leading short video apps in China at the time.
With a ceiling that they couldn’t shatter, Zhu and Yang began to explore the prospect of selling their company. Facebook’s Mark Zuckerberg offered USD 1.6 billion for Musical.ly in 2016, according to an individual who was part of the negotiations, but the offer fell through because Facebook decided that the short video market wasn’t worth exploring; it already had Instagram. Kuaishou also expressed interest in acquiring Musical.ly but didn’t have the cash to commit to a deal.
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In May 2017, ByteDance representatives connected with Musical.ly’s co-founders. Douyin had more than 1 million DAUs and was gaining traction. Yang and Zhu had three demands—their app had to be renamed to shed its teen-associated image, it would have to incorporate ByteDance’s algorithms, and ByteDance had to earmark USD 1 billion for the app’s marketing budget.
Six months later, Zhang accepted the terms, and ByteDance acquired Musical.ly for USD 1 billion in cash and stock.
As the deal was being negotiated, TikTok was being deployed in Japan, Korea, Southeast Asian countries, India, and Brazil. While important regions for its international expansion, ByteDance was keen to gain traction in the United States, and the acquisition of Musical.ly was a crucial component of this strategy.
Initially, TikTok’s team focused on markets in East Asia, while the US and European countries were targets for Musical.ly. The two teams operated independently, and occasionally collided in conflict. In ByteDance’s internal high-level communications, Zhang used codes to refer to TikTok, Musical.ly, and their activities to prevent the two teams from gleaning insights about each other’s developments and strategies.
Face off with Facebook
One year after the acquisition, Douyin’s DAUs were in the range of 200 million. At the same time, Musical.ly was undergoing a rebranding and its algorithms were being updated. This was when TikTok was chosen as the official name of Douyin’s international counterpart.
As part of the acquisition agreement with Musical.ly, ByteDance was pouring cash into marketing expenses for its multinational short video app. In Q1 2019, the company doubled the marketing budget for TikTok compared with Q3 2018.
This was justified by the hefty price of acquiring new users. In the US, the cost for each new member was USD 10. ByteDance wasn’t focusing on how long it might take to recoup that cost. Instead, the company’s priority was the potential average revenue that each daily active user could provide. By analyzing data that led to insights about Facebook’s average revenue per user in more than 100 markets, the team at TikTok was able to formulate a spending plan in various countries and regions.
And spend it did. TikTok burned cash, including USD 1 billion just for ads on Facebook. At the time, Facebook’s annual revenue in China was roughly USD 5 billion, according to a person with knowledge of the matter. The ad splash didn’t give Facebook pause—TikTok’s user retention rate was still low.
Soon after, TikTok’s short video format paired with rapid delivery made it one of the most popular apps in the world. A clip uploaded by a user in the US could be watched by users anywhere in the world, leading to revenue generation all around the world. Even if revenue figures from one region failed to impress, TikTok’s global revenue consistently dropped jaws.
In the first half of 2019, ByteDance began to diversify its user acquisition channels. It placed ads on Google and Snapchat, just in case costs to use Facebook increased. Facebook’s allocation in TikTok’s budget went from 20% to 10%.
It wouldn’t take long for Facebook to notice the threat that TikTok posed. By mid-2019, the short video app’s global DAUs surpassed 100 million. Facebook quickly developed its own contender that mimicked TikTok—called Lasso—which was released in the US and Mexico. Lasso shut down the following year.
Continuing the momentum
After Musical.ly was acquired by ByteDance, it took some time for Zhang Yiming to recognize the vital work of Alex Zhu.
At first, Zhang was not accustomed to Zhu’s operational style, which resembled that of a foreign enterprise. Eventually, Zhu reported to Kelly Zhang (Zhang Nan), one of the key figures behind the creation of Douyin, while Kelly Zhang oversaw both of ByteDance’s short video apps. In June 2019, Zhu took charge of Douyin for a short period of time, while Kelly Zhang was responsible for ByteDance’s overseas operations.
Throughout those developments, Zhang Yiming was unsatisfied by the trajectory of TikTok.
In the hallways and meeting rooms of ByteDance’s headquarters, Zhu stood out. He kept his hair long, loved poetry, and was often found with a light scarf adorning his neck. He commuted using the subway, which was uncommon for high-level executives in major tech companies. Zhu spoke good English and could navigate the cultural nuances of other countries owing to his many years spent abroad. All in all, he was well liked by ByteDance staff members.
As a company goes global, cultural conflicts are inevitable. Zhu downplayed these frictions by focusing on defining TikTok’s mission, vision, and values. He framed this by saying that “TikTok is a canvas, a window, and a bridge.”
By the beginning of 2020, TikTok’s had nearly 250 million DAUs. The COVID-19 pandemic was beginning to spread around the world—this would have profound consequences for the app.
In February that year, TikTok’s senior management were made aware that Facebook COO Sheryl Sandberg had spoken about TikTok’s rapid growth during an interview. This rattled TikTok’s team, as they were now in Facebook’s crosshairs. Zhu called for an emergency meeting to discuss the ramifications of removing TikTok’s Facebook SDK, which lets TikTok users log in to Facebook using their credentials on the short video app. They decided to pull up the drawbridge.
While Zhu continued to lead TikTok’s expansion outside of China, Yang, his co-founder at Musical.ly, was operating in the education space for ByteDance. He developed a smart lamp that helps students do their homework.
Meanwhile, the pandemic cemented TikTok’s status as one of the world’s most significant consumer apps.
This article was adapted based on portions of a feature originally written by Zhang Jun (WeChat ID: benita-story) and edited by Gao Yulei. KrASIA is authorized to translate, adapt, and publish its contents.